Monday, November 4, 2013

SMRT Corp. - Earnings Continue To Surprise On The Downside (MKE)

Steep fall in earnings, cost escalation continues. SMRT reported a 57% decline in net income to SGD14.4m for 2QFY03/14. Profitability of the fare-based business continued to suffer from the lack of fare increase in an escalating cost environment. The core MRT business recorded EBIT of merely SG3.9m YTD, as compared to EBIT of SGD65m for whole of FY03/13. Despite government aid from the Bus Service Enhancement Programme (BSEP), the bus operations continued to suffer losses at a run-rate of SGD7m a quarter. Overall, earnings for the quarter surprised on the downside and we lower our forecasts accordingly.

Interim dividend reduced further. With reduced profitability for 1HFY03/14, SMRT lowered its interim dividend to 1.0 cent (FY13: 1.5 cents). Assuming management’s CAPEX guidance of SGD500m for FY14 is maintained, we expect net gearing to rise to 0.8x by end-Mar 2014 (0.6x at end-Sept 2013). With a weakened balance sheet, we do not expect final dividend to be increased and expect full year payout of 2.0 cents, translating to a yield of merely 1.6%.

Imminent change in business model, terms of transition remains uncertain. In its outlook statement, management highlighted ongoing discussions with the authorities on “details for a timely transition to a viable and sustainable model for the Train and Bus businesses”. While a change to the business model appears imminent, we caution against turning positive on the stock as terms for the transition remains highly uncertain. Our concern centres on the asset buyback terms for the existing rail lines that were awarded under the old rail financing regime. Hence, we opine that it is highly speculative to buy on hopes that the transition terms would be favourable to SMRT.

Maintain SELL, TP: SGD0.80. With structurally higher leverage and poor dividend yield support, we argue that SMRT should de-rate from its historical levels. Despite a 26% decline in its stock price over the past year, SMRT continues to trade at expensive valuations of 30x FY14E P/E and yields merely 1.6%. Maintain Sell with reduced TP of SGD0.80 based on 14x average FY14-16E EPS.

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